Supply Chain Strategy: Back to Basics

Supply chain management (SCM) should enable companies to develop and execute strategies that efficiently integrate the management of all the players in a supply chain — suppliers, manufacturers, distributors, and customers — so that production and distribution are accomplished at the lowest possible total cost while meeting customer needs. In reality, though, companies struggle to achieve success in managing their supply chains.

Among the many issues that make supply chain effectiveness challenging are complexity in mass customization, product line proliferation, shorter product life cycles, pressure for faster innovation, stress from quicker technology cycles, tougher, non-negotiable service levels, extended global supply chains, abundant channels and markets, and business cycle variability. With 40 to 70 percent of costs embedded in the typical supply chain, it is critical that companies manage their supply chains optimally to achieve the highest returns now — and in the future, as the business environment changes. Companies with successful SCM programs employ eight basic best practices:

1. Start with strategy, but be practical. Go ahead — ask the “what if” questions about your supply chain. This will help you assess alternatives. But remember that the best supply chain strategy is one you can accomplish. Make it specific, not general; practical, not conceptual. Include elements of process, technology, organization, control philosophy, and metrics. Think through the details. It’s not enough to say that you want to employ global sourcing; to actually implement the strategy, you must specify the components, the countries, and the suppliers.

2. Manage the entire supply chain with a focus on the customer. SCM should span all links in the supply chain, from suppliers to logistics providers to distributors to production facilities and warehouses to customers. This entire network should be aligned to achieve the same goals: serving end customers’ needs and, to the greatest extent possible, delivering products that customers want when they want them, and at the prices they are willing to pay.

3. Get on the CEO’s agenda. A top-down SCM approach — that is, an initiative endorsed and led by the chief executive officer — is critical to securing senior management buy-in and ensuring that the strategy will yield good results. A Booz Allen Hamilton survey found that companies that assign SCM to functional leaders achieve 55 percent less in savings than those whose CEO plays a hands-on role in linking SCM to overall corporate strategy.

4. Control trade-offs between cost and service. Smart trade-offs between cost and service are critical to the effective design of the supply chain network and to achieving the goal of satisfying customer needs. For example, overemphasis on service can lead to excess inventory and capacity. Alternatively, when too much attention is paid to cost, service elements — stock on hand, quality, customer satisfaction, and on-time delivery — can suffer, which can hurt sales. Supply chain design should address these questions: What kind of inventory, plants, warehouses, people, capabilities, and suppliers are needed? Where should they be located? Should they be owned or should they be outsourced?

5. Ensure that key stakeholders communicate. The objectives of business functions frequently conflict. This can weaken the supply chain so much that in short order it affects the company’s performance. For example, sales may be dead set on meeting quarterly revenue targets, regardless of the inventory implications. Or manufacturing managers may be entirely focused on cost reduction, while completely disregarding its effects on customer service. With these different perspectives competing against one another, cost, service, and revenue are not optimized. Open discussion among business units and a management-led initiative to achieve a carefully crafted supply chain strategy are essential to ensure that decisions are made to benefit the corporation as a whole.

6. Be smart about customization. Customers are demanding ever more customized products and services, but customization adds expensive and wasteful complexity to the supply chain if it is not carefully planned for and managed. More part and product configurations mean more suppliers, more inventory, and shorter production run times. Before burdening the supply chain with these costs, assess the value of the additional products or services to the customer and the company. Complexity can be reined in through effective product architecture and by fully understanding all associated costs.

7. Understand the value and risks of technology. Information technology should not be used to replace broken links in the supply chain. Processes complementing the company’s SCM strategy must be designed first — then the right technology infrastructure can support the strategy. Managers may be tempted to eliminate the critical human element and rely only on software to manage the supply chain. But software can’t possibly understand a company’s strategic plan, or intelligently adjust the supply chain when it fails to match customers’ needs. In SCM, there is no substitute for knowledgeable, hands-on managers; technology can help provide data to make good decisions.

8. Adapt to changing business realities. Many SCM initiatives fail because they’re constrained by the existing supply chain structure. In those cases, the supply chain is tweaked, based on a limited short-term perspective, when it needs to be optimized by radically altering practices and processes. Frequent reexamination of the supply chain, with no limits placed on the assessment, is necessary if companies are to ensure that the supply chain strategy remains effective. Economies evolve, markets evolve, and channels evolve, and so must the supply chain. What works in one business environment may be unsuccessful in another. Continual adaptation of the supply chain to support frequently changing business realities — particularly new product introductions and new business launches — is a critical step to enduring market leadership.

Author Profiles:

Keith Oliver ([email protected]) is a senior vice president with Booz Allen Hamilton in London. During more than 35 years in consulting, he has helped senior executives address strategic issues involving the management of the extended enterprise, from suppliers to end customers.Dermot Shorten ([email protected]) is a vice president with Booz Allen Hamilton in Boston. Mr. Shorten focuses on value stream restructuring, with specific expertise in supply chain management, supply base configuration, and manufacturing strategy.Harriet Engel ([email protected]) is a senior associate with Booz Allen Hamilton in New York. Ms. Engel has advised businesses in multiple industries, and organizations in the nonprofit and public sectors, on supply chain management strategy and implementation.

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